Financial Aid and the Plight of the Financially-Challenged

I am a huge fan of need-based aid, as I described in this post last week. That doesn’t mean there aren’t some problems with the system. At the end of the day, most universities still prefer students that can pay their part. To do this, while maintaining the need-blind admission label, universities have employed a few techniques.

cost of college, need-based financial aid

Colleges adjust policies to attract high income students

One of these ways is early admission. Early admission policies allow students to apply in the fall to their favorite schools, and in return, those students must commit earlier to attend these schools. That seems harmless enough on the surface. In fact, a senior year of high school where one already has college plans sorted sounds like a lot of fun.

The problem is, information on financial aid packages is still not available until the spring. If the amount of financial aid offered could influence your decision (aka, paying full price is not an option for you), then you may not be able to commit early. This is one way that colleges can ensure they are getting students that can contribute more in tuition.

A second way is by offering merit-based scholarships rather than need-based scholarships. How could offering more scholarships be bad for poorer students? Seems crazy, right? This is how it could work. A $5000 merit-based scholarship for a student that can pay the remaining $20000 is far better for the school than offering a $20,000 need-based scholarship for a student that can only pay $5000.  With that $20,000 need-based scholarship, the school can offer four $5000 merit scholarships, bringing in $80,000 in tuition.

This is especially helpful for state-owned schools, where out-of-state students pay a much higher price. Giving them a merit-based scholarship may convince them to attend, when they will actually still pay much more than the average student. According to a May study by the New America Foundation, the percentage of students at private universities that received merit-based aid increased from 24% to 44% from 1995-97 to 2006-07, while the percentage receiving need-based scholarships decreased from 43% to 42%.

Along similar lines, the increase in student loan limits seems at first like a measure that should help low-income students. In reality, however, the increase in student loan limits has come with rising tuitions. There are many reasons for those rising costs, as we’ve discussed in past posts, but the net result is that low-income students graduate with much more debt than in the past. Students graduated with an average annual debt load of $35,200 this year, according to research from Fidelity Investments.

So what’s happened as a result of all this? Unsurprisingly, high-performing students from lower income backgrounds are less likely to attend prestigious schools. This has some serious consequences for those students. Similarly performing students that attend more selective universities have better chances of graduating and higher lifelong earnings.

According to research from the Georgetown Public Policy Institute, students with SAT scores of 1100-1199 that attended one of the 468 most selective schools had an 81% graduation rate, while those that attended open access two and four year schools had graduation rates of only 53%. Ten years after finishing schools, the graduates from the selective programs made $67,000 a year, on average, compared to $49,000 for those attending less selective schools.

The new ranking system that the Education Department is working on may address some of these issues. It will be tough to reach the proper balance in that ranking, as we’ve highlighted before, but it is a project worth pursuing.

For the record, the New America Report highlighted the fifteen schools below for being particularly generous in offering need-based aid, so for any of you out there looking at colleges, keep these guys in mind: Amherst College, Vassar College, Grinnell College, Williams College, MIT, Wellesley College, Cooper Union, Stanford University, University of Richmond, Pomona College, Rice University, Cornell University, Bowdoin College, Wesleyan University, and Dartmouth College.

Can Obama’s Higher Education Reform Pass?

Obama’s higher education reform is ambitious. In fact, one could call it ambitious if the Democrats controlled both houses of Congress. With the current, divided Congress, it looks like something between wishful thinking and a kamikaze crash. Some might wonder why Obama bothered to introduce this plan, or any plan for anything ambitious really. There is little to no chance these proposals will survive in the House of Representatives. Obama’s plan calls for more government oversight, with complicated caveats, which conservatives can’t stand. Plus, agreeing with Obama on almost anything can have political consequences for red-state representatives.

Obama, edtech, higher education reform

Obama’s Higher Education Reform Faces Challenges in Congress

So why did he do it? Well, looking more closely, we can see that many of his proposals don’t actually require Congressional approval. For example, he asked the Dept of Education to create a new university ranking system based on value, affordability, and other factors by 2015. By 2018, he wants to tie those ranks to the distribution of financial aid. For the first task, he doesn’t need approval. For the second, he does, but not until 2018, more than a year after he leaves office.

By that time, the rankings system will have been in place for a few years. Maybe if it works well, Congress will go for it. Maybe they won’t. If not, Obama will lose a key element in his reform plan, but some important goals are still likely to be accomplished. Schools will hopefully begin paying attention to these issues in the same way, or even more carefully, than factors like selectivity and average test scores that improve standing in US News & World Report’s annual ranking.

It is a bit like one of those diets where they ask you to write things down. Even if you don’t consciously change your behavior, the fact that you are writing it down and paying attention influences your habits. Check it out here, if you don’t believe me. Hopefully, the Education Dept’s rankings can bring this sort of awareness to the nation’s colleges and universities. Earlier this year, the Dept website already began publishing more information about colleges and universities on its College Scorecard webpage.

On loan repayment, the President’s administration can make some significant progress, even without Congress. Obama cannot automatically make all borrowers eligible for the pay-as-you-earn program without Congress. He can extend eligibility to all direct loan (from the Education Dept) borrowers, though, just not those that borrowed through the FFEL program, which was discontinued in 2010. And those in the FFEL program can generally convert loans into direct loans, so in a sense, most borrowers are eligible, if they take the time and effort to make themselves so. The Education Dept does not need approval for its awareness program, which basically educates students and recent grads about their eligibility for benefits.

Finally, for the new emphasis on technology, discussed in our last post, the Obama administration has few congressional hurdles. Of course, many of the bullet points on the plan are simply statements of support, so it is tough to stop measures that are not specifically spelled out yet. In terms of announced funding, Obama will need congressional approval for his $260 million “First in the World” program promoting innovation, but not for the Labor Dept’s $500 million program for accelerated degree programs at community colleges and some four-year universities.

For the competency-based credit system and the re-design of courses and student services through technology, all areas which are important for Rukuku and its business, the administration is free to begin launching experimental programs. We’re excited about that and looking forward to joining in. Let the innovation begin.

To Borrow is Human; to Forgive, Divine.

In our last post, we talked about Obama’s plan to cap student loan payments at 10% of monthly income. Today we’re looking at another part of program, the loan forgiveness clause. When student debt payments drag on until the 20 year mark, the government automatically erases the debt. For those working in the public sector, the government takes over the debt after 10 years.

Student Loan, Obama Higher Education Reform

Uncle Sam forgives the remaining student loan debt after ten years for those working in the public sector.

The challenge with such a program is, as with anything anywhere, preventing people from taking advantage of the rules. Politico brought one such case to light recently, related to the 10 year forgiveness plan for public sector employees. Law schools at Georgetown and other universities advertised programs requiring no student loan payments ever, partly because of government programs.

In a sense, it is a generous program. Georgetown offers to make ten years of loan payments for law graduates that work in the public sector. But then, the government takes care of the rest, and this is even advertised on the program website. Check it out here.

With income-based payments, borrowers obviously make less progress on the underlying principal, meaning a larger amount is still outstanding after ten years. For professional school graduates, that amount can easily reach beyond $100,000.

For reference, here’s the politico story:

It is not quite as scandalous as an iPhone pic of a private part, but it is hard to believe this is what lawmakers were hoping for when they passed the original law in 2007 or when Obama shortened the time limits and lowered the income caps last year. (nor what Apple was hoping for when it created the iPhone).

When the government caps the payments at 10% of income, one would assume it is the borrower making those 10% payments, not their former university or anyone else. Does that count as extra income, for example? If so, do they have to recalculate the 10%? This is only one case, of course, and not an egregious one, but my guess is there will be more, especially as the program expands.

All that being said, an average participant in the program does get a lighter load in leaner times and still has responsibility for the loan. That’s what the program should do. Graduates don’t get out of the debt by making lower payments. They just extend the amount of time they will be paying on the loan, which of course means more interest payments long term. But they get a break, when they need it.

While the government will forgive the loan after 20 years (10 years in the public sector, as I mentioned above), 20 years of paying 10% of your income and still being in debt does not seem like getting off that easily. People are creative, though. Going forward, we’ll see how many more stories come up involving imaginative ideas for offloading loans at that ten or even twenty year mark. Feel free to share any such ideas in the comments section.

In our next post, we’ll look at the cost control aspects of Obama’s plan.

Education in Debt: Part Two

So what are the effects of all this student debt? For one, the whole backpacking around Europe after graduation is much less cool than it used to be. So is everything else that used to be cool, like bar tending, ski bumming, trail blazing, or starting a software company in your mom’s garage. Actually, that last one may still be cool, if it was ever cool, but it is clearly more difficult to do with student loan payments to make.


The long term effects of all this debt are surprisingly significant, a recent study from the New York-based Demos Group shows. A dual-headed household, in which both partners graduated with bachelor’s degrees and an average debt load, earns $208,000 less than households of graduates with no student debt, according to the study.

That’s a huge difference and it all relates to early investment. Young adults in debt put off projects such as home ownership and retirement planning to pay off those student loans. Demos estimates that two thirds of the difference in lifetime earnings stems from diminished retirement savings and another third is lost because indebted households build less home equity.

On another note, less easy to quantify, young graduates in debt are less likely to take risks, entrepreneurial or otherwise. The twenties is a time to take some risks, to travel, to explore, to open a bar with a buddy or buy a house in a cool, but rough part of town. Or for those overachievers, it is time to get started on building a life in a place with a job and a house. But it is tougher for recent graduates to do any of these things these days, and student debt is one of the primary reasons.

Education in Debt: Part One

College is a great investment.  Graduates from bachelor’s programs earn about $500,000 more during their lifetimes than peers with only high school diplomas. In fact, even those that go to college but don’t graduate will get around $100,000 more in lifetime earnings than high school only graduates, according the DC-based Hamilton Project, which is part of the Brookings Institution. In a June study, the group concluded that investment in a college education offers returns two to three times higher, on average, than those from investments such as stocks, bonds, gold, treasury bills, and housing.

Student debt, young graduate debt

Young graduates struggle to stay ahead of their student debt payments

Still, college is expensive, even if it is a good investment. And it is getting more expensive. Educational costs rose 165% from 1993 to 2011, more than broad inflation and medical care costs, which were up 56% and 100% respectively, according to Emily Dai of the Federal Reserve Bank of St. Louis. Several factors are involved.

One is that, once upon a time, most people that worked at universities were in the classroom teaching. Nowadays, there are more administrators, vice-provosts, assistant deans and chairpersons of committees on something or another. There are more researchers as well. A report from the DC-based Delta Cost Project showed that the proportion of education spending set aside for instruction decreased from 2000 to 2010, with costs related to research, student services, academic and institutional services all growing more quickly. Student-to-teacher ratio has hardly changed in thirty years.

Schools are also spending more money on facilities that will attract quality students and well-known professors. That sounds reasonable. Everyone wants good students and teachers. At the same time, I am not sure if you want your students to stay because of a nice swimming pool. Well, except that if they drop out, or even if they get accepted but decide not to come, that affects your school’s ranking in the college books and magazine ratings.

While spending has gone up, financial support at the state and local levels has dropped off significantly. Most universities have tried to fill the gap, or at least some of it, with higher tuition. In 2010, for the first time ever, tuition contributed more toward education expenses at public research and master’s institutions than local and state government appropriations, according to Delta.

Luckily, or sort of luckily, there are many programs to help students pay for school, including scholarships, grants, loans, and work-study programs. Most students, 71% according to the Department of Education, receive some form of financial aid. Forty two percent take out federal student loans.

Those loans can easily be repaid once these students are all out in the real world and making big bucks. Only that doesn’t always happen. As it turns out, not every business venture needs a philosopher (my major, by the way). Few 18-year olds truly understand the amount of risk and responsibility they take on when signing those loan papers. Many of them don’t know to separate colors from whites in the laundry either.

With this in mind, it is easy to draw parallels to the conditions preceding the mortgage crisis. Abundant credit is readily available to inexperienced buyers, a situation which feeds market bubbles. In real estate, we know how that story ends, or least the most recent chapter. Housing prices inflated, then popped, wreaking havoc on the national economy, then the global economy. In the case of education, it is the tuition prices inflating, and we don’t yet know the consequences. In other words, student loans, which help individuals go to school, are pushing up prices for college attendees as a whole.

Emily Dai of the St. Louis Federal Reserve Bank explains, “A college education, like home ownership before the financial crisis, is increasingly viewed as a social good – but one that could quickly become a liability. And the maximum federal loan amount available to students continues to increase, underpinning the fear of the size of the potential liability.”

Defaults are already rising. A study released from the Consumer Financial Protection Bureau earlier this month finds that almost one third of all federal borrowers are in default, deferment, or forbearance.

Nationally, outstanding student debt now totals more than $1 trillion, doubling since 2007.  That total is still less than mortgage debt, but more than outstanding credit card debt or automotive debt. And it is more difficult to escape than credit card or mortgage debt as well. You can give a house back to the bank and declare bankruptcy for most other debts, but that won’t erase student loans.

In our next post, we’ll look at some of the effects this debt has on young graduates.